In Uncategorized on 09/17/2015 at 00:17

That’s what Susan, Bonnie, Carol and Lois did when they undertook the pay their Ma’s gift tax, and the estate tax if the gifts Ma was giving them was clawed back into Ma’s estate if Ma died within the three-year clawback rule.

If this sounds familiar, it is. See my blogpost “Don’t Assume?” 9/30/13. And the unanswered question at the end of said blogpost, namely, what was the worth of the assumed estate tax liability, is answered at last in Jean Steinberg, Donor, 145 T. C. 7, filed 9/16/15, Judge Kerrigan still with this case.

So we have a “net, net gift” as both gift tax and estate tax fell upon the four ladies aforesaid (hereinafter “The Four”).

Two years ago, Judge Kerrigan said a trial would be necessary to see what the value to the late Jean’s estate of the assumption by The Four in dollars and cents.

So we’re back to our old chums the hypothetical willing seller and willing buyer, neither of whom exists. “The ‘willing buyer/willing seller’ test is the bedrock of transfer tax valuation. It requires us to determine what property rights are being transferred and on what price a hypothetical willing buyer and willing seller would agree for those property rights.” 145 T. C. 7, at p. 15.

Judge Kerrigan analogizes the assumption of tax liabilities here to the buyer of a corporation whose big assets are subject to built-in gain. Clearly there would be a heavy-duty two-way tax on liquidation or sale, so the buyer would pay the seller less, since the buyer would have to deal with both tax consequences.

But the issue here is benefit to the donor’s estate. This means what is the cost of replenishing the estate with the amount of tax dollars (estate and gift) if The Four hadn’t agreed to pick up the taxes.

IRS’ argument that the deal between Jean and The Four merely duplicates New York law (our Estates, Powers and Trust Law Section 2.1-8, which provides for apportionment of tax on beneficiaries where testator so directs) founders on two points: Jean was alive when the assumption took place, so could change either or both of her will and her domicile. Once she made the deal with The Four, State law is off the table.

So the assumption is an asset that benefits Jean’s estate.

“Conceivably, the value of this new asset might not be precisely equal to the actuarial value of the contingent estate tax liability that the daughters assumed. But the record contains no expert testimony that would support a value lower than that. Nor does respondent contend that uncertainties surrounding the application of the New York apportionment statute render the value of the daughters’ contractual assumption ‘too speculative’ to be considered for Federal gift tax purposes. Quite the contrary: Respondent concedes that whether ‘the section 2035(b) estate tax liability is too speculative * * * is not an issue in this case.’” 145 T. C. 7, at p. 24.

IRS tries to rehash their losing intrafamily gift arguments from the September 2013 case they lost, but Judge Kerrigan blew that off then, and blows it off now. Even though not made in the ordinary course of business, the deal was negotiated extensively, the parties all had independent counsel, and no one claims the deal wasn’t bona fide or arms’-length.

Best of all, The Four have an expert, and IRS has only the Michael Corleone gambit.

The expert used the IRS’ Section 7520 mortality and interest rate tables.

“Respondent contends that Mr. [Ace Appraiser] should have also considered petitioner’s health and general medical prognosis. The Commissioner’s mortality tables necessarily take some account of a person’s health and general medical prognosis when arriving at a probability of death. Respondent has not pointed to any specific facts or circumstances that would justify special consideration of petitioner’s health or general medical prognosis beyond use of the mortality tables, and the evidence does not suggest that the tables produce an unreasonable result.” 145 T. C. 7, at p. 30. (Name omitted).

The IRS’ final card cannot trump The Four’s ace appraiser.

“…respondent contends that the section 7520 rates are not applicable here because they apply only to annuities, life interests, terms of years, remainders, and reversionary interests.

“Mr. [Ace Appraiser] calculated the present value (the value on the day that the parties signed the net gift agreement) of the daughters’ potential liability to make a payment to petitioner’s estate in one of the subsequent three years. The fact that the payment is contingent rather than certain does not preclude use of the section 7520 rates. It simply requires adjusting the value of the payment to take into account the likelihood of the contingency. Mr. [Ace Appraiser] did account for the contingency by using the Commissioner’s actuarial tables. Respondent has not persuaded us that there was a more appropriate method that should have been used. We conclude that the valuation was proper.” 145 T. C. 7, at p. 31. (Name omitted).

The Four have turned the tables on IRS.


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